Professor Wagner Fall 1999

46

Professor Wagner Fall 1999

BUSINESS ASSOCIATIONS

I. CHAPTER 1: AGENTS AND EMPLOYEES

A. Section 1: An Introduction To The Organization of Business

1. Fowler v. Pennsylvania Tire Company 5th Circ. 1964

FACTS: Penn Tire entered into a K with Martin’s Tire whereby it agreed to deliver tires for resale at prices and terms set by Martin’s Tire. The K was termed a consignment with title being expressly reserved with Penn Tire. Martin’s Tire filed a voluntary petition on bankruptcy. Penn Tire petitions to reclaim the tires under the consignment, asserting that the trustee (Fowler) cannot have possession.

ISSUE: Whether Penn Tires had retained title to the tires under a consignment, in which case it can retrieve the tires, or had transferred title to Martin under a conditional sales contract, in which case (because Penn Tires failed to perfect any security interest) the tires are an asset of Martin, to be sold for the benefit of all creditors.

COURT: A transaction in goods is considered a consignment if the contract called for title to remain in the party delivering the goods. The CT looks to the transaction to ascertain the correct intent of the parties. Fowler contends that despite the express language indicating a consignment, the subsequent actions of the parties showed that the tires belonged to Martin’s Tire. Fowler relies on Goodyear Tire and Matter of Klein, both of which the CT distinguishes based on Martin’s Tire never having title and there being no bad faith, respectively. CT relies on the language of the K since the K was not ambiguous. Note: With a consignment, once the goods have been delivered to the dealer, the dealer has no obligation to pay for them as with a sales K.

DISSENT: Should not be limited to the four corners of the agreement when the parties did not operate in the manner called for by the K. Tires were invoiced as “Sold to Martin’s Tire”. Prices and terms at Martin’s Tire discretion, sales proceeds went into the general bank account, etc. Penn Tire’s solution was to ensure that could reclaim upon bankruptcy of Martin’s Tire.

CLASS:

·  Fowler wants it characterized as a sale so that more goes into the “bankruptcy pot”, as do creditors and employees.

·  Evidence that Penn Tire is trying to retain control:

1.  Title retained by Penn Tire

2.  Segregation and marking of stock

3.  Risk of loss

4.  Inventory reports

·  In TX, the policy is to protect creditors, so why did the CT characterize it as a consignment?

Factors:

1.  Facilitate or hinder commerce.

2.  Fairness: Maybe the creditors should have investigated whether the tires were assets or not.

·  UCC § 2-326(3) [page 9]: Without a security interest in the goods, the goods are subject to the claims of the buyer’s creditors while in the buyer’s possession (if maintains same kind of business under a different name).

·  Various Business Setting Options for Penn Tire:

1.  “Within the Firm”: Company-operated store with an employee manager- Master-Servant. Adv: More control but possibly less profits; protecting the value of the trademark or tradename is easier.

2.  “Across Markets”: Sales through an independent distributor: entrepreneur buys products to sell- Independent Contractor.

3.  “Consignment Sales” Independent sells on consignment- No title, simply the agent.

2. Business Participants

a.  Owners

·  Want to retain some level of control

Exception: Publicly held corporation (shareholders)

b.  Managers

·  Employee

·  Specific status and duties

·  Corporation: “Directors”

c.  Creditors

·  Receive protection in commercial law and corporate law.

·  Suppliers (ex. Penn Tire) extend credit in the form of materials necessary to operate business.

·  Lenders/Banks

d.  Customers *

·  Protected through Consumer Protection Laws

e.  Workers *

f.  Public Interest *

* Protection is evolving for these participants.

3. Business Substantive Issues: “Deal Points”

a.  RISK OF LOSS

·  Protected by corporate law provisions under state law

b.  RETURN ON INVESTMENT

·  Owners: want profit or simply return on individual investment.

·  Managers: compensation (salary, bonuses, stock options, etc.).

·  Creditors: want to protect their interest vis a vis the business.

c.  CONTROL

·  By owners, managers, and creditors – decided by who has the right to the residual interest. Example: Want at-will employees.

·  Determine what line of business, what areas to expand or contract – decisions affecting the bottom line of profitability.

d.  DURATION

·  How long is the business going to be set up for?

e.  LIMITS ON ACTION

·  Fiduciary Duty: implies special responsibilities in dealing with a particular party.

·  Government Regulation: environmental, financial institutions dealing with public money, etc. – Parties cannot K around these.

There is a governing body of statutes for these participants and issues, but parties can agree to K outside of the statutes.

* c,d,e are “deal points” or negotiating tools; d,e are dictated by either statutory rule or K. *

Co-Owned Store

+/ Control, higher return, guaranteed distribution, easier protection

of value of trademark or trade name.

-/ Costs, not as strong incentives for managers (salary, no share of

profits---so, despite guaranteed distribution, sales may be less

than with an incentive-driven independent contractor).

Sale Through an Independent Outlet

+/ Less at risk(financial investment, no outlay for brick and mortar

establishment, no need to develop expertise, no hiring issues.

-/ Less control (can negotiate control terms that fall back to an

agency relationship – ex. quality control

mechanisms…inspections, periodic reports, level of sales

maintained, limited pushing of competing tires)

4. Agency

Restatement (Second) Agency § 1

Agency; Principal; Agent

(1) Agency is:

·  the fiduciary relation

·  which results from the manifestation of consent

·  by one person

·  to another

·  that the other shall act on his behalf

·  and subject to his control,

·  and consent by the other so to act

(2) The one for whom action is taken is the principal.

(3) The one who is to act is the agent.

Restatement (Second) Agency § 2

Master; Servant; Independent Contractor

(1)  A master is

·  a principal

·  who employs an agent

·  to perform service in his affairs

·  and who controls

·  or has the right to control

·  the physical conduct of the other

·  in the performance of the service

(2)  A servant is

·  an agent

·  employed by a master

·  to perform service in his affairs

·  whose physical conduct

·  in the performance of the service

·  is controlled

·  or is subject to the right to control

·  by the master

(3)  An independent contractor is

·  a person who contracts

·  with another

·  to do something

·  for him

·  but who is not controlled

·  by the other

·  nor subject to the right to control

·  with respect to his physical conduct

·  in the performance of the undertaking.

·  May or may not be an agent.

- Master/Servant is an employment relationship.

B.  Section 2: Employee Versus Independent Contractor and the Exercise of Control

1.  Humble Oil & Refining Co. v. Martin TX 1949

FACTS: Martin, injured when a car rolled out of a service station owned by Humble, sought to hold Humble liable for the station operator’s (independent contractor) negligence.

COURT: A party may be liable for a contractor’s torts if he exercises substantial control over the contractor’s operations. In this case, the contractor relationship breaks down and the master-servant relationship is formed.

2.  Hoover v. Sun Oil Company Del. 1965

FACTS: Hoover sought to hold franchisor Sun Oil responsible after he was injured in afire at a service station franchise operated by Barone. The agreement called for a certain level of compliance by Barone, but Barone was left in control of the day-to-day operations of the station.

COURT: A franchisee is considered an independent contractor of the franchisor if the franchisee retains control of the inventory and operations. The test is whether the oil company has retained the right to control the details of the day-to-day operation of the service station; control or influence over results alone being viewed as insufficient.

3.  Difference between Humble Oil and Sun Oil

·  Both are cases tort cases involving vicarious liability/respondeat superior. Oil companies are brought into the suits on the “deep pockets” theory.

·  FACTORS:

1.  Investment/Rent/Compensation

2.  Reports

3.  Setting of hours

-  In light of the termination provision, this is not so significant a factor b/c even if operator sets his own hours, owner can terminate if he is not happy with it.

4.  Training/Supervision

5.  Corporate Trademark

6.  Hiring Employees

7.  Duration

·  Physical (control as to manner in which job is performed) “day-to-day control is the key factor:

-  SO did not set hours; HO set hours.

-  HO and SO owned the stations.

-  HO paid 75% of the operating costs; SO: not clear who paid the operating costs, but Barone “alone assumed the overall risk of profit or loss”.

-  HO made Schneider prepare reports and perform duties; SO did have a representative make biweekly visits.

-  HO involved in the hiring, firing, and training of employees…could they have prevented the accident?; Barone controlled the hiring and firing in SO.

·  Theories for holding owner liable in tort:

-  “Deep Pockets” –Ability to bear costs.

-  Patrons rely on the representations made at the station.

·  Why should the person most able to bear the risk be the one liable?

-  The person with the greater investment may attempt to externalize the risks associated with the business by shifting the control to the operators. To prevent this, should owners make sure that operators have insurance?

-  Party with the most to risk has the incentive to avoid liability and has a greater financial ability to compensate.

4.  Murphy v. Holiday Inns, Inc. Va. 1975

FACTS: Murphy sought to hold Holiday Inn, Inc. liable when she slipped and fell at a motel operated by a franchisee. Involves a “license agreement”.

COURT: If a franchise contract so regulates the activities of a franchisee as to vest the franchisor with control within the definition of agency, a principal-agent relationship arises even if the parties expressly deny it. In this case, however, Holiday Inn included several requirements in the contract to achieve system-wide standardization of business identity, uniformity of commercial service, and optimum public good will. The provisions were not provided to and did not control the day-to-day operation of the motel.

CLASS:

- Betsy-Len owned the motel in this case, unlike the oil co. cases.

- The nature of the injury sometimes influences whether or not the “deep

pockets” should be reached.

- P relied on an “actual agency” theory. Why not an “apparent agency”

theory?

C.  Section 3: Control and the Liability of Creditors

1.  Gay Jenson Farms Co. v. Cargill, Inc. Minn. 1981

FACTS: Warren operated a seed elevator and purchased grain and seed from local farmers. Cargill provided the working capital to Warren, and as Warren became more and more financially unsound, Cargill became more involved in its day-to-day operations. Warren nevertheless defaulted on contracts with local farmers who are suing Cargill on an agency theory.

COURT: A creditor who assumes control of his debtor’s business may be held liable as a principal for the acts of the debtor in connection with the business (R.2d § 14 O and R.2d § 1). Although no express agency was created in the agreement, the course of dealings indicate that Warren acted on Cargill’s behalf in procuring the grain, and Cargill interfered in Warren’s internal affairs. No buyer-supplier relationship existed because R.2d § 14 K states that the supplier must have an independent business, buyer receives a fixed price, and act under his own name. Warren’s operations were financed by Cargill and Warren sold almost all grain to Cargill alone (no independent business).

CLASS:

- Cargill and Warren had a “paternalistic relationship”. Cargill was acting

more to secure a source of grain than as a lender.

- Farmers go to Cargill for “deep pockets”.

- Buyer-Supplier Argument: The idea is that as a supplier, Warren is

taking the risk, not Cargill as in a principal-agent relationship. The court

rejects this argument b/c no indep. business, paternalistic relationship,

and since Cargill extended the credit, without Cargill, there wouls be no

Warren.

- Although the 9 factors were to some extent what any normal creditor

would exercise, Cargill overstepped its bounds. The telephone calls and

everyday supervision were too much.

- Cargill continues to extend more and more credit to fulfill its business

obligations involving grain and to keep the profits from resale coming

in.

- Law and economics analysis:

Who could better handle the losses?

·  Although it was probably not customary to do so b/c they needed grain storage, the farmers could have demanded cash for the grain immediately.

·  Cargill could have dealt directly with the farmers, but maybe the farmers preferred to go through Warren.

·  Cargill could have demanded receipts from Warren (false reports of paying farmers turned in by Warren).

- To restructure the agreement so that Cargill will not be responsible in the

future, Cargill should pull the line of credit or notify farmers that they

are not liable for Warren (notice of no liability, but may interfere with

course of supply). There is, however, sometimes lender liability

for suddenly pulling a line of credit.

- If trade creditors notify that they are not liable, it tips off other lenders

and banks who may also withdraw their credit. Warren may have tort

action against Cargill for impairment of business reputation.

- R.2d § 14 O states that a creditor simply exercising veto power does not

make them a principal; it is de facto control that makes a creditor a

principal.

- Cargill could have bought Warren, but then it would need resources to

diversify and it would use up some of those profits it otherwise had.